MinistryCPA - Corey A. Pfaffe, CPA, LLC

Question: A pastor would like to have his tithe deducted from his paycheck by the church as a pre-tax reduction. Because he believes that this would entitle him to a charitable donation deduction and help him avoid paying income and self-employment tax, he feels that this would be a beneficial arrangement. What are your thoughts? Answer: While it is true that an employee could agree with his employer for a cut in pay, in fact, we do not believe that the situation described here qualifies. First , constructive receipt rules require taxpayers to report all earnings that are made available to them, regardless of actual physical receipt. Second, it would likely appear to some in the congregation who do not have full knowledge of the situation that the pastor has simply ceased giving to the church. Based on these considerations, this is certainly not a strategy we would endorse, nor, most likely, would many tax authorities who became aware of the situation. Additionally, if a chur...

Question: A church recently eliminated two staff positions. It took a love offering for the staff members in order to provide a severance package which recently expired. However, the church is still receiving checks designated for those individuals. How should it treat these gifts? Answer: A love offering is generally an action taken by a corporate body, initiated by the church rather than individuals. A love offering taken on behalf of a employee who has provided services to the church is taxable compensation. If the more recent designated gifts are still a result of a corporate action by the church, they should be treated as taxable compensation, deductible as charitable contributions by the donors. For example, if the church has communicated that members are encouraged to continue to give to the former staff members through the church, this treatment will apply. However, if the gifts are simply acts of individuals in the church giving to other individuals, they are neither...

Question: A church supports an independent missionary who is ministering overseas. The church receives gifts for the missionary and forwards those on for her use for both ministry and personal expenses, but it does retain oversight over the use of the funds. How should the church treat this arrangement for tax purposes? Should it report the full amount of support forwarded as compensation, or should it only report compensation in excess of business expenses? Answer: Based on the information presented above, the missionary should likely be classified as an employee for reporting purposes. However, not all missionaries should be classified as employees; the IRS provides detailed guidelines on the difference between an employee and an independent contractor, which are referenced in this previous blog post: Church Employee or Independent Contractor . If a missionary is properly classified as an employee, the church has two options for reporting: report the full amount of compensati...

Question: A church owns a parsonage on which it makes a monthly $500 mortgage payment. The fair rental value of the property is $800 per month. The church would like to allow its minister to live in the parsonage and pay to the church only the mortgage payment each month because it cannot afford to provide him with additional cash compensation. First, is this a legal arrangement? Second, what are the tax consequences? Answer: This arrangement appears to violate no legal requirements that we are aware of. The parsonage allowance will be income-tax free, but the pastor should report the full fair rental value as housing allowance on Form 1040, Schedule SE when filing his personal income taxes. Additionally, the church should designate at least $500 per month of the pastor's cash compensation as housing allowance since he has at least that much of justifiable housing expenses. He will be responsible to estimate a justifiable fair rental value in excess of his payment for purpose...